Accountants’ Handbook Special Industries and Special Topics 10th Edition_8 pptx

32.7 NEW DISCLOSURE REQUIREMENTS 32
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Exhibit 32.9 Continued.
(b) REQUIRED NOTE DISCLOSURES ABOUT CAPITAL ASSETS AND LONG-TERM LIA-
BILITIES. Details should be disclosed in the notes about capital assets and long-term liabili-
ties of the primary government, divided into their major classes and between those associated
with governmental activities and those associated with business-type activities. Capital assets
not being depreciated should be disclosed separately. The following information should be dis-
closed about major classes of capital assets:
• Beginning- and end-of-year balances, with accumulated depreciation presented separately
from acquisition cost
• Capital acquisitions
• Sales or other dispositions
• Current depreciation expense, including the amounts charged to each of the functions in the
statement of activities
Collections of works of art, historical treasures, and similar assets not capitalized should be
described and the reasons they are not capitalized should be given. Disclosures as above should
be given for collections capitalized.
The following information should be disclosed about long-term debt and other long-term li-
abilities, such as compensated absences, claims, and judgments:
• Beginning- and end-of-year balances
• Increases and decreases, presented separately
• The portions of each due within one year
• The governmental funds that typically have been used to liquidate other long-term liabilities
Whether to make similar disclosures about capital assets and long-term liabilities of dis-
cretely presented component units is a matter of professional judgment, depending on each in-
dividual component unit’s significance to the total of all discretely presented component units
and the component unit’s relationship with the primary government.
(c) DISCLOSURES ABOUT DONOR-RESTRICTED ENDOWMENTS. The following in-
formation should be disclosed about donor-restricted endowments:

• Net appreciation on investments of donor-restricted endowments available for authorization for
expenditure by the governing board and how it is reported in net assets
• State law about the ability to spend net appreciation
• The policy for authorizing and spending investment income, such as a spending-rate or total-
return policy
(d) SEGMENT INFORMATION. Segment information should be disclosed by governments
that report enterprise funds or that use enterprise fund accounting and reporting standards. For
purposes of this disclosure, a segment is an identifiable activity (or grouping of activities) re-
ported as or within an enterprise fund or another stand-alone entity for which one or more
bonds or other debt instruments (such as certificates of participation) outstanding, with a rev-
enue stream pledged in support of that debt. (Such disclosure is not required for activities
whose only outstanding debt is conduit debt for which the government has no obligation be-
yond the resources provided by related leases or loans, and for individual funds reported as
major funds.) In addition, the activity’s revenues, expenses, gains and losses, assets, and liabil-
ities are required to be accounted for separately. (The requirement for separate accounting
should be imposed by an external party; for example, accounting and reporting requirements
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STATE AND LOCAL GOVERNMENT ACCOUNTING
commonly are set forth in bond indentures.) Disclosure requirements for each segment should
be met by identifying the types of goods and services provided and by presenting condensed fi-
nancial information in the notes, including the elements in the three subbullets under the sec-
ond bullet below:
• The kind of goods or services provided by the segment
• A condensed statement of net assets:
• Total assets, distinguishing between current assets, capital assets, and other assets, with
amounts receivable from other funds or components reported separately
• Total liabilities, distinguishing between current and long-term amounts, with amounts
payable to other funds or components reported separately

• Total net assets, distinguishing between restricted net assets––with expendable and non-
expendable components reported separately, unrestricted net assets, and amounts in-
vested in capital assets, net of related debt
• A condensed statement of revenues, expenses, and changes in net assets:
• Operating revenues, by major source
• Operating expenses, with depreciation and amortization identified separately
• Operating income or loss
• Nonoperating revenues and expenses, separately reporting major revenues and expenses
• Capital contributions and additions to permanent and term endowments
• Special and extraordinary items
• Transfers
• Change in net assets
• Beginning net assets
• Ending net assets
• A condensed statement of cash flows:
• Net cash provided by:
• Operating activities
• Noncapital financing activities
• Capital and related financing activities
• Investing activities
• Beginning cash and cash equivalent balances
• Ending cash and cash equivalent balances
Whether to provide segment information about component units that use enterprise fund ac-
counting and reporting standards is a matter of professional judgment, depending on each indi-
vidual component unit’s significance to the total of all discretely presented component units and
the component unit’s relationship with the primary government.
Governments are encouraged to present a statement of activities disaggregated for their
multiple-function enterprise funds beyond that required for segment reporting. Special-
purpose governments in only business-type activities are encouraged to do the same.
32.8 REPORTING COMPONENT UNITS

When GASB Statement No. 34 becomes effective, discrete presentation of component unit fi-
nancial information should be given in the statement of net assets and the statement of activities.
However, information on component units that are fiduciary in nature should be included only in
32.8 REPORTING COMPONENT UNITS 32
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the fund financial statements, together with the primary government’s fiduciary funds. Informa-
tion required by paragraph 51 of GASB Statement No. 14 about each major component unit can
be given by:
• Presenting each major component unit other than those that are fiduciary in nature in separate
columns in the statements of net assets and activities,
• Including combining statements of major component units (with nonmajor component units
aggregated in a single column) with the reporting entity’s basic statements after the fund finan-
cial statements, or
• Presenting condensed financial statements in the notes.
The “aggregated total” component unit information, as discussed in paragraph 14 of GASB
Statement No. 14, should be the entity totals derived from the component units’ statements of
net assets and activities. (Because component units that are engaged in only business-type ac-
tivities are not required to prepare a statement of activities, this disclosure should be taken from
the information provided in the component unit’s statement of revenues, expenses, and changes
in fund net assets.)
If component unit information is presented in the notes, the following should be included:
• Condensed statement of net assets:
• Total assets, distinguishing between capital assets and other assets. Amounts receivable from
the primary government or from other component units should be reported separately.
• Total liabilities, distinguishing between long-term debt and other liabilities. Amounts
payable to the primary government or to other component units should be reported
separately.
• Total net assets, distinguishing between restricted, unrestricted, and amounts invested in
capital assets net of related debt

• Condensed statement of activities:
• Expenses by major functions and for depreciation expense if separately reported
• Program revenues by type
• Net program expense or revenue
• Tax revenues
• Other nontax general revenues
• Contributions to endowments and permanent fund principal
• Special and extraordinary items
• Change in net assets
• Beginning net assets
• Ending net assets
The nature and amount of significant transactions with the primary government and other
component units should be reported in the notes for each component unit.
32.9 REQUIRED SUPPLEMENTARY INFORMATION
OTHER THAN MD&A
In addition to the information required to be presented as RSI by GASB Statement Nos. 10, 25,
and 27, other RSI required to be presented by GASB Statement No. 34 when it becomes effec-
tive includes MD&A, budgetary comparison schedules for governmental funds, and information
about infrastructure assets reported using the modified approach (see Section 32.6(b)(1)).
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STATE AND LOCAL GOVERNMENT ACCOUNTING
(a) NEW BUDGETARY COMPARISON INFORMATION. When GASB Statement No. 34
becomes effective, budgetary comparison schedules
5
should present: (1) the original appropri-
ated budgets; (2) the final appropriated budgets; and (3) actual inflows, outflows, and balances,
stated on the governmental budgetary basis as discussed in NCGA Statement No. 1, paragraph
154. Separate columns may be provided comparing the original budget amounts with the actual

amounts, the final budget amounts with the actual amounts, or both. The original budget is the
first complete appropriated budget, which may be adjusted by reserves, transfers, allocations,
supplementary appropriations, and other legally authorized legislative and executive changes
made before the beginning of the reporting year. It also includes appropriation amounts auto-
matically carried over from prior years by law. The final budget is the original budget adjusted
by all legally authorized legislative and executive changes whenever signed into law or other-
wise legally authorized.
Information in a separate schedule or in notes to RSI should be provided that reconciles bud-
getary information to GAAP information. Notes to RSI should disclose excesses of expenditures
over appropriations in individual funds presented in the budgetary comparison, as discussed in
NCGA Interpretation No. 6, paragraph 4, as amended by GASB Statement No. 37. (If the bud-
getary comparison information is included in the basic statements, these disclosures should be
in the notes to the financial statements rather than as notes to RSI.)
(b) MODIFIED APPROACH FOR REPORTING INFRASTRUCTURE. A government with
eligible infrastructure assets (for subsystems, if any) reported using the modified approach
should present as RSI these schedules derived from the asset management systems:
• The assessed condition, based on assessments performed at least every three years, for at least
the three most recent complete condition assessments, indicating the dates of the assessments
• The estimated annual amount calculated at the beginning of the year to maintain and preserve
the assets at or above the condition level established and disclosed by the government com-
pared with the amounts actually reported as expense for each of the past five reporting periods
The following should be disclosed with the schedules:
• The basis for the condition measurement and the measurement scale used to assess and report
condition. For example, a basis could be distresses in pavement surfaces. A scale could range
from zero for a failed pavement to 100 for pavement in perfect condition.
• The condition level at which the government intends to preserve its eligible infrastructure as-
sets reported using the modified approach.
• Factors that significantly affect trends in the information reported in the schedules, includ-
ing any changes in the basis for the condition measurement, the measurement scale, or the
condition measurement methods used. Also to be disclosed is an estimate of the effect of a

change in the condition level at which the government intends to preserve eligible infra-
structure assets of the estimated annual amount to maintain and preserve the assets for the
current period.
A government that has asset management systems for infrastructure assets that gather the in-
formation required under this subsection but do not use the modified approach are encouraged to
disclose it as supplement information.
32.9 REQUIRED SUPPLEMENTARY INFORMATION 32
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5
Governments may elect to report the budgetary comparison information in a budgetary comparison
statement as part of the basic financial statements rather than as RSI. Such an additional statement should
include the same items of information that this section requires to be displayed or disclosed.
32.10 BASIC FINANCIAL STATEMENTS REQUIRED FOR
SPECIAL-PURPOSE GOVERNMENTS
Special-purpose governments are legally separate entities that are component units as described in
Section 32.4(c) or other stand-alone governments, which are legally separate government organiza-
tions that (1) do not have separately elected governing bodies and (2) are not component units, plus
joint ventures, jointly governed organizations, and pools.
A special-purpose government that is engaged in more than one governmental program or that
has both governmental and business-type activities should meet the reporting requirements for gov-
ernments that are not special-purpose governments. A special-purpose government is engaged in
more than one governmental program if it budgets, manages, or accounts for its activities as multiple
programs, such as a school district that provides regular instruction, special instruction, vocational
education, and adult education.
(a) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED IN GOVERNMEN-
TAL ACTIVITIES. A special-purpose government engaged in a single governmental activity,
such as some cemetery districts, levee districts, assessment districts, and drainage districts, may
combine its government-wide financial statements and its fund financial statements in a columnar
format that reconciles line items of fund financial information to government-wide information in

a separate column on the face of the financial statements rather than at the bottom of the state-
ments or in an accompanying schedule. Otherwise, the special-purpose government may present
separate government-wide and fund financial statements and may present its government-wide
statement of activities in a different format. For example, it may be presented in a single column
that reports expenses first followed by revenues by major sources. The difference, net revenue or
expense, should be followed by contributions to permanent and term endowments, special and ex-
traordinary items, transfers, and beginning and ending net assets.
(b) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED ONLY IN BUSI-
NESS-TYPE ACTIVITIES. A government engaged in only business-type activities should pre-
sent only the financial statement required for enterprise funds:
• MD&A
• Enterprise fund financial statements:
• Statement of net assets or balance sheet
• Statement of revenues, expenses, and changes in fund net assets
• Statement of cash flows
• Notes to financial statements
• Applicable RSI other than MD&A
(c) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED ONLY IN FIDU-
CIARY ACTIVITIES. A special-purpose government engaged in only fiduciary activities
should present only the financial statement required for fiduciary funds:
• MD&A
• Statement of fiduciary net assets
• Statement of changes in fiduciary net assets
• Notes to financial statements
A PERS is a special-purpose government that administers one or more defined benefit pen-
sion plans and may also administer other kinds of employee benefit plans, such as defined con-
tribution, deferred compensation, and postemployment health care plans. One that administers
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STATE AND LOCAL GOVERNMENT ACCOUNTING
more than one defined benefit pension plan or postemployment health care plan should present
combining financial statements for all such plans and, if applicable, required schedules for each
plan. (A PERS that administers one or more agent multiple-employer plans applies these re-
quirement at the aggregate plan level.) It should (1) present a separate column for each plan on
the statement of fiduciary net assets and the statement of changes in fiduciary net assets or (2)
present combining statements for the plans as part of the basic financial statements. A PERS
should conform with Section 32.6 for all other plans.
32.11 TRANSITION TO THE REQUIREMENTS OF
GASB STATEMENT NO. 34
(a) REPORTING GENERAL INFRASTRUCTURE ASSETS AT TRANSITION. Beginning with
the effective dates of GASB Statement No. 34, prospective reporting of general infrastructure assets
is required in the statement of net assets. Retroactive reporting is encouraged for all major general in-
frastructure assets at that date. Such major assets are those that (1) meet the definition of a major
asset stated in Section 32.11(c)(i), (2) are associated with and generally arise from governmental ac-
tivities (not from proprietary funds and special-purpose governments engaged in business-type ac-
tivities), and (3) are long-lived capital assets that normally are stationary in nature and normally can
be preserved for a significantly greater number of years than most capital assets. Retroactive report-
ing of such assets is required for governments described in footnote 37 as follows:
• Phase 1 governments—fiscal years beginning after June 15, 2005.
• Phase 2 governments—fiscal years beginning after June 15, 2006.
• Phase 3 governments are encouraged but not required to report them retroactively.
If it is not practical to determine the acquisition cost of general infrastructure assets because
of inadequate records, a government should estimate and report the acquisition cost of major
general infrastructure assets acquired or significantly reconstructed or that received significant
improvements in fiscal years ending after June 30, 1980. Methods of estimating such cost and
accumulated depreciation are discussed in Sections 32.11(c)(iii) and (iv).
Information for networks for which it is available should be reported during the transition
period if it is not available for all networks.
During transition, these disclosures should be made:

• Descriptions of the infrastructure assets being reported and of those not being reported
• A description of eligible infrastructure assets the government intends to report using the modi-
fied approach
(b) TRANSITION TO THE MODIFIED APPROACH FOR REPORTING INFRASTRUCTURE
ASSETS. A government may begin to use the modified approach for reporting eligible infrastruc-
ture assets when one complete condition assessment is available and the government documents that
the assets are being preserved approximately at or above the condition level the government has es-
tablished and disclosed. If the three most recent complete condition assessments and the estimated
and actual amounts to maintain and preserve the infrastructure assets for the previous five reporting
periods required as discussed in Section 32.9(b) are not initially available, the information required
by that section should be reported for as many complete condition assessments and years of esti-
mated and actual expenses as are available.
(c) INITIAL CAPITALIZATION OF GENERAL INFRASTRUCTURE ASSETS
(i) Determining Major General Infrastructure Assets. Major general infrastructure assets
should be determined at the network or subsystem level based on two criteria:
32.11 TRANSITION TO THE REQUIREMENTS OF GASB STATEMENT NO. 34 32
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1. The actual or estimated cost of the subsystem is expected to be at least 5% of the total actual
or estimated cost of all general capital assets reported in the first fiscal year ending after June
15, 1999.
2. The actual or estimated cost of the network is expected to be at least 10% of the total ac-
tual or estimated cost of all general capital assets reported in the first fiscal year ending
after June 15, 1999.
(ii) Establishing Capitalization at Transition. If inadequate records make determining acquisi-
tion cost at initial capitalization impractical, acquisition cost may be estimated.
(iii) Estimating Acquisition Cost—Current Replacement Cost. If the acquisition costs of assets
need to be estimated, their current replacement cost may be determined and reduced back to the ac-
quisition year or estimated acquisition year using public-sector or private-sector price indexes. Accu-
mulated depreciation on assets being depreciated would be determined based on the reduced amounts.

(iv) Estimated Acquisition Cost from Existing Information. Bond documents used to obtain fi-
nancing for construction or acquisition of infrastructure assets, expenditures reported in capital pro-
ject funds or capital outlays in governmental funds, and engineering documents are examples of
other information that may provide sufficient support for establishing initial capitalization.
32.12 GRANT ACCOUNTING
(a) DEFINITIONS. A grant is a contribution or gift of cash, or other assets from another govern-
ment to be used or expended for a specified purpose, activity, or facility. Some grants are restricted
by the grantor for the acquisition or construction of fixed assets. These are capital grants. All other
grants are operating grants.
An entitlement is the amount of payment to which a government is entitled pursuant to an allo-
cation formula contained in applicable statutes. A shared revenue is a revenue levied by one gov-
ernment but shared on a predetermined basis with another government. Grants, entitlements, and
shared revenues have become major sources of revenues for governments. Frequently, however,
special accounting and reporting requirements are associated with these grants.
(b) FUND IDENTIFICATION. All grants, entitlements, and shared revenues should be accounted
for in one of the seven fund types. The identity of the fund should be based on the purpose or require-
ments of the grant. For instance, grants, entitlements, or shared revenues received for purposes normally
financed through the general fund may be accounted for within that fund, provided that applicable legal
requirements can be appropriately satisfied. Resources received for the payment of principal or interest
on general long-term debt may be accounted for in a debt service fund. Capital grants or shared revenues
received for capital acquisitions or construction, other than those associated with enterprise and internal
service funds, may be accounted for in a capital projects fund. However, it is not always necessary to es-
tablish a separate fund for an individual grant, entitlement, or shared revenue. Existing funds should be
used to the extent possible in order to comply with the minimal number of funds principle.
If a grant, entitlement, or shared, revenue may be used for more than one purpose and the recipi-
ent has not determined the purposes for which it intends to use the funds, the resources may be ac-
counted for in an agency fund pending determination of their use. When the determination is made,
the assets and revenues should be recognized in the appropriate fund and removed from the agency
fund. Since most grants, entitlements, or shared revenues are either unrestricted as to purpose or re-
stricted to a specific purpose, there is seldom a need to use an agency fund.

(c) REVENUE AND EXPENDITURE (EXPENSE) RECOGNITION.
Grants, entitlements, and
shared revenues recorded in governmental funds should be recognized as revenue when they become
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STATE AND LOCAL GOVERNMENT ACCOUNTING
susceptible to accrual, that is, measurable and available. Legal and contractual requirements should be
carefully reviewed. If the restriction is more form than substance, revenue should be recognized at the
time of receipt or earlier. If the grant is earned by the recipient government as funds are expended for a
specific restricted purpose, revenue should be recognized when the expenditures are made for that pur-
pose. The latter are called “expenditure-driven” grants.
Grants, entitlements, and shared revenues received before the revenue recognition criteria are met
should be reported as deferred revenue and reported as a liability account in the government’s finan-
cial statements. Resources not received should be reported as a receivable if the revenue recognition
criteria have been met. If the resources have not been received and the revenue recognition criteria
have not been met, the grants should not be reported on the balance sheet at all. They may, however,
be disclosed in the notes to the financial statements.
Grants, entitlements, and shared revenues that are received by a proprietary fund for operating
purposes, or that may be used for operations or capital purposes at the discretion of the recipient gov-
ernment, should be recognized as nonoperating revenue when earned. Resources restricted to the ac-
quisition or construction of capital assets should be recorded as contributed capital.
Operating expenses should include depreciation on all depreciable fixed assets, including assets
acquired with contributed capital. Depreciation recognized on assets acquired or constructed with
contributed capital may be charged to the contributed capital account by “adding back” the depreci-
ation on such assets to net income before closing it to retained earnings.
To promote greater consistency with respect to the accounting and financial reporting for grants
and similar financial assistance by state and local governments, the GASB issued Statement No. 24,
“Accounting and Financial Reporting for Certain Grants and Other Financial Assistance.” Statement
No. 24 addresses issues relating to the recognition, measurement, and reporting of grants and other

financial assistance received and given by state and local governments including:
•
“Pass-through” grants
•
Food stamps and similar voucher programs
•
“On-behalf ” payments of fringe benefits and salaries
32.13 ACCOUNTING PRINCIPLES AND PRACTICES—
PUBLIC COLLEGES AND UNIVERSITIES
Public colleges and universities should apply the principles discussed in this chapter.
32.14 AUDITS OF GOVERNMENTAL UNITS
Audits of governmental units with financial statements can be performed in accordance with:
•
Generally accepted auditing standards (GAAS)
•
Government Auditing Standards (the “Yellow Book”)
•
The Single Audit Act Amendments of 1996 and OMB Circular A-133
When performing an audit in accordance with GAAS, the guidance contained in the AICPA Pro-
fessional Standards is followed. This is the same guidance followed by auditors when auditing the fi-
nancial statement of commercial entities and typically results in the issuance of an opinion of the
financial statements and perhaps a management letter. Government Auditing Standards, also known
as the “Yellow Book” (U.S. Comptroller General, rev. 1994), establishes the concept of an expanded
scope audit that includes both financial and compliance features. According to the Yellow Book, a fi-
nancial audit can help determine whether:
•
The financial statements of an audited entity present fairly the financial position and the results
of financial operations in accordance with GAAP
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The entity has complied with laws and regulations that may have a material effect on the finan-
cial statements
The Yellow Book incorporates the AICPA Professional Standards mentioned above and sets forth
additional standards and requirements, including the following six:
1. A review is to be made of compliance with applicable laws and regulations, as set forth in fed-
eral audit guides and other applicable reference sources.
2. The auditor reports on the entity’s compliance with laws, regulations, contracts and shall also
include material instances of noncompliance and instances or indications of illegal acts found
during or in connection with the audit.
3. The auditors shall report on their consideration of the entity’s internal control structure made
as part of the financial audit.
They shall identify as a minimum:
a. Scope of auditor’s work in obtaining an understanding of the internal control structure and
assessing risk.
b. The reportable conditions including separate identification of material weaknesses identi-
fied as a result of the auditor’s work.
4. Auditors performing government audits are required to obtain 80 hours of continuing educa-
tion every two years, of which 24 hours should be directly related to government. At least 20
of the 80 hours should be completed in each year of the two-year period.
5. Audit organizations performing government audits are required to establish an internal quality
control system and participate in an external quality control review program.
6. The auditor communicates certain information related to the conduct of the audit to the audit
committee or to the individuals with whom they have contracted for the audit.
(a) T
HE SINGLE AUDIT ACT AMENDMENTS OF 1996. Many state and local governments
are
required to obtain a periodic audit of the federal funds they receive—usually once a year. The audits
are normally performed by an independent CPA or public accountant, or, in some states, by the gov-

ernment’s internal audit personnel. A few jurisdictions have an independently elected or appointed
auditor who conducts the audit. Single audits are conducted in accordance with GAAS, Government
Auditing Standards, and the Single Audit Amendments Act of 1996 and its implementing regulation
OMB Circular A-133, including its Compliance Supplement. These requirements have been updated
for fiscal years beginning on or after July 1, 1997, by the Single Audit Amendments Act of 1996.
The objectives of the Act are:
•
To improve the financial management of state and local governments with respect to federal fi-
nancial assistance programs through improved auditing
•
To establish uniform requirements for audits of federal financial assistance provided to state
and local governments
•
To promote the efficient and effective use of audit resources
•
To ensure that federal departments and agencies, to the maximum extent practicable, rely on
and use audit work performed pursuant to the requirements of the Single Audit Act
Though the single audit builds on the annual financial statement audit currently required by most
state and larger local governments, it places substantial additional emphasis on the consideration and
testing of internal controls and the testing of compliance with laws and regulations.
The Single Audit Act and OMB Circular A-128 require the auditor to determine whether:
•
The financial statements of the government, department, agency, or establishment present
fairly its financial position and the results of operations in conformity with GAAP
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STATE AND LOCAL GOVERNMENT ACCOUNTING
•
The organization has internal and other control structures to provide reasonable assurance that

it is managing federal financial assistance programs in compliance with applicable laws and
regulations
•
The organization has complied with laws and regulations that may have a material effect on its
financial statements and on each major federal financial assistance program
The governmental units that are subject to single audits include those that receive $100,000 or
more of federal financial assistance in any fiscal year. If a government receives between $25,000 and
$100,000 of federal assistance, the entity has the option of having a single audit or separate grant au-
dits performed. For those governments receiving less than $25,000 in assistance, there is an exemp-
tion from the Single Audit Act requirements.
The Single Audit Act provides auditors with guidance on the focus of the audit by defining a level
of audit work based on the concept of “major” and “nonmajor” federal assistance programs. Major
programs (not grants) are typically the larger programs in which an entity participates and are deter-
mined on a sliding scale by the relationship between the expenditures of the program and the total
federal expenditures of the entity. For most small and medium-sized governments, a major program
is defined as the larger of $300,000 or 3% of the total federal expenditures for all federal programs.
For larger governments whose total federal expenditures exceed $100 million, the Single Audit
Act defines a major federal financial assistance program based on a sliding scale.
The Single Audit Act and OMB Circular A-128 require the auditor to issue several reports:
For the entity:
•
A report on the audit of the general purpose or basic financial statements of the entity as a
whole, or the department, agency, or establishment covered by the audit
•
A report on internal control based on an understanding and assessment of the internal control
structure obtained as a part of the audit of the general purpose or basic financial statements
•
A report on compliance with laws and regulations that may have a material effect on the finan-
cial statements
For its federal financial assistance programs:

•
A report on a supplementary schedule of the entity’s federal financial assistance programs,
showing total expenditures for each federal assistance program
•
A report on compliance with laws and regulations identifying all findings of noncompliance
and questioned costs
•
A report on internal control structure used in administering federal financial assistance programs
In March 1990, the Office of Management and Budget (OMB) issued OMB Circular A-133, “Au-
dits of Institutions of Higher Education and Other Nonprofit Organizations.” The audit objectives
contained in OMB Circular A-133 are patterned after the Single Audit Act of 1984 (described in the
preceding section) and bring under the single audit umbrella nonprofit orga
nizations receiving federal
funds. Although the Circular was issued primarily for nonprofit organizations receiving federal funds,
institutions of higher education that are operated by a state or local government may elect to conduct a
single audit under the provisions of OMB Circular A-133 versus the audit requirements associated with
the Single Audit Act of 1984.
In 1995, OMB began a process intended to combine the regulations governing single audits into
a single document. As a part of this process, OMB proposed changes to Circular A-133. OMB indi-
cated that these changes would serve as a model for requested changes to the Single Audit Act of
1984 and that, if those changes were made, Circular A-128 would be abolished and that state and
local governments would follow Circular A-133. The major proposals in this revision include:
•
Use of the concept of risk in determining which programs to audit
•
Raising the threshold for an audit to $300,000
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•

Reduce the time period for submission of the single audit results from 13 to 9 months
•
Expansion of the scope to include hospitals
(b) OTHER CONSIDERATIONS. Most government officials and auditors of governmental units
realize that a good audit should furnish more than an opinion on the financial statements. Other ser-
vices a governmental auditor can provide are pinpointing the key information upon which decisions
should be based and contributing to the presentation of this information in a manner that facilitates
decision making; uncovering deficiencies in the accounting system and providing suggestions for
improving the efficiency and effectiveness of the system; and obtaining and presenting information
useful for marketing securities.
Obtaining a qualified auditor, particularly one who can provide the additional services described
above, requires that the selection be based on qualifications and experience, and not solely cost. The
National Intergovernmental Audit Forum, in its handbook How to Avoid a Substandard Audit: Sug-
gestions for Procuring an Audit, indicates:
Public entities should never select auditors without considering five basic elements of an effective
audit procurement process:
•
planning (determining what needs to be done and when),
•
fostering competition by soliciting proposals (writing a clear and direct solicitation document
and disseminating it widely),
•
technically evaluating proposals and qualifications (authorizing a committee of knowledgeable
persons to evaluate the ability of prospective auditors to effectively carry out the audit),
•
preparing a written agreement (documenting the expectations of both the entity and the auditor), and
•
monitoring the auditor’s performance (periodically reviewing the progress of that performance).
This handbook provides detailed information about the five elements of procurement listed above
as well as the use of audit committees in a government environment and other useful information

about the auditor procurement process.
(i) Governmental Rotation of Auditors. The automatic rotation of auditors after a given num-
ber of years is a common practice in many governments; however, it is not always beneficial.
Many governments have followed this policy, believing that they will (1) receive a fresh outlook
from the audit, (2) spread the work among several firms, and (3) encourage lower fees. In actual-
ity, automatic rotation may be harmful in that it could deprive the government of the extensive
knowledge of the entity developed by the current auditor. It may also impair auditing effectiveness
since a new auditor may need to spend considerable time learning the government’s system—the
government may actually incur more cost since its personnel will need to spend time explaining
the organization, systems, and data to the new auditors, and the new auditors will need to spend
valuable time reviewing information that is already part of the previous auditor’s workpapers. Al-
though a government should continuously monitor its auditor’s performance to assure that the ser-
vice obtained is commensurate with the cost, the entity should normally change auditors only
because of dissatisfaction with services and not for the sake of receiving a lower fee.
(ii) Audit Committees. In recent years, governments have started establishing audit committees
similar to those in the private sector. Some appropriate tasks for a local government’s audit commit-
tee are:
•
Reviewing significant financial information for reliability, timeliness, clarity, appropriateness
of disclosure, and compliance with GAAP and legal requirements
•
Ascertaining that the internal control structure is appropriately designed and functioning
effectively
•
Evaluating independent audit firms and selecting one for approval by the appropriate body
32
•
92
STATE AND LOCAL GOVERNMENT ACCOUNTING
•

Overseeing the scope and performance of the independent audit function
•
Ensuring that the auditors’ recommendations for improvements in internal controls and operating
methods receive management’s attention and are implemented on a timely basis
•
Providing an effective communications link between the auditors and the full governing board
The primary benefit of an audit committee is in assisting the full governing board to fulfill its re-
sponsibilities for the presentation of financial information about the governmental unit. There
are also secondary benefits: The other parties involved in the issuance of financial informa-
tion—management and independent and internal auditors—can perform their roles more effec-
tively if an audit committee is involved in the process. Finally, there are advantages for the
government’s constituencies—in particular, the taxpayers and bondholders.
32.15 PROPOSED CHANGES AND OTHER MATTERS
(a) FINANCIAL REPORTING MODEL. GASB Statement No. 11 required the introduction of
accrual-basis operating statements for governmental activities. The effective date of Statement No.
11 was delayed indefinitely by Statement No. 17. This delay was to allow the GASB to complete ad-
ditional research on the financial reporting model, capital reporting, pension accounting, risk financ-
ing, and insurance projects. Recent actions by the GASB have made it apparent that the GASB
intends to develop a new statement that would completely replace Statement No. 11.
(b) OTHER ISSUES AT THE GASB. The GASB is also dealing with other current issues facing
state and local governments. As a part of the financial reporting model project, the GASB also in-
tends to address conceptual issues such as the definition of an asset and related presen
tation issues,
such as what footnotes should be required. Meanwhile, the GASB is also addressing other topics of in-
terest. The GASB has been researching postemployment benefits other than pensions in anticipation of
developing a statement regarding recording these liabilities.
(c) ACCOUNTING FOR MUNICIPAL SOLID WASTE LANDFILL CLOSURE AND POST-
CLOSURE CARE COSTS. GASB Statement No. 18, “Accounting for Municipal Solid Waste
Landfill Closure and Post-closure Care Costs,” provides guidance in response to the issuance of
U.S. Environmental Protections Agency rule, “Solid Waste Disposal Facility Criteria,” which re-

quires owners and operators of municipal solid waste landfills (MSWLFs) to perform various clo-
sure functions and post-closure monitoring and maintenance functions as a condition for the right
to operate a MSWLF.
The guidance applies to MSWLFs that accept municipal solid waste and are required to incur clo-
sure and post-closure care costs. Specifically, the guidance would require recognition of MSWLF clo-
sure and post-closure care costs as an expenditure/expense and as a liability in each period in which
the landfill accepts waste. Recognition would be based on a systematic and rational method that as-
signs estimated total current costs to periods based on landfill use rather than the passage of time.
The estimated total current cost of MSWLFs’ closure and post-closure consist of the follow-
ing costs:
•
Equipment and facilities used in post-closure monitoring and care
•
Final cover
•
Maintenance and monitoring the landfill during the post-closure period
State and local governments with MSWLFs will be required to disclose in the financial state-
ments the nature and source of landfill closure and post-closure care costs and the fact that the costs
are being recognized based on estimated total current costs while the landfill is operating regardless
32.15 PROPOSED CHANGES AND OTHER MATTERS 32
•
93
of when related disbursements are made. In addition, disclosure of financing arrangements for clo-
sure and post-closure care costs would be required along with an indication of whether or not such fi-
nancing arrangements were in compliance with applicable laws and regulations.
(d) INVESTMENT VALUATION. The GASB recently concluded its consideration of investment
valuation by state and local governments and issued Statement No. 31, “Accounting and Financial
Reporting for Certain Investments and for External Investment Pools.” Statement No. 31 requires
that most of the typical investments of a state or local governmental entity be reported at fair value.
The investments covered by Statement No. 31’s fair value standards include all debt securities and

equities (as well as option contracts, stock warrants, and stock rights) that have readily determinable
fair values. In addition, open-end mutual funds and investments in interest-earning investment con-
tracts and external investment pools are also reported at fair value.
Statement No. 31 also requires that investment income, which is defined to include changes in the
fair value of investments, should be reported as revenue in the operating statement.
The GASB is currently working on an implementation guide to address some of the questions
that state and local governments may have in implementing this Statement.
(e) AUDIT QUALITY. Perhaps one of the most recurring topics in the government industry today
is audit quality. The results of GAO studies of the quality of audits of government units
have indi-
cated that audit fieldwork and reporting were deficient in a significant number of
audit engagements.
Because the auditor is one defense mechanism against improper spending of federal funds, the GAO
looks unfavorably on auditors who are performing substandard work
and has taken steps to alleviate
the problem. Government Auditing Standards includes a requirement for auditors performing govern-
ment audits to meet minimum continuing professional education requirements and for auditing firms to
have independent quality control revie
ws at least once every three years.
(f) SUMMARY. Governmental accounting and reporting is changing and expanding at an in-
creasing rapid rate. Coupling this with public accountability issues, the federal government’s
pressure for increased audit quality, and the penalties for substandard audit performance re-
sults in increasing levels of audit risk. Government audits, often considered low-risk engage-
ments by many, are quickly becoming areas of extremely high risk. Auditing professionals
need to recognize the risk associated with government engagements now and in the future be-
fore incurring severe penalties or embarrassment. The technical issues involved in government
auditing are on a par with those in the commercial environment but auditors have much less
experience and less technical guidance to fall back on.
Dealing with these technical issues requires well-trained, highly motivated individuals and can
no longer be left to less experienced members of the audit team. Dealing with the real issues gov-

ernments are facing (e.g., infrastructure, AIDS, prison overcrowding, drugs, etc.) requires even more
from the individuals in the profession. Like it or not, government accounting and reporting is being
thrust into the spotlight and will be scrutinized by a multitude of individuals and groups. It is imper-
ative that individuals in the industry realize this fact and begin now to prepare for the future.
32.16 SOURCES AND SUGGESTED REFERENCES
American Institute of Certified Public Accountants, “Audits of State and Local Government Units,” Industry
Audit and Accounting Guide. AICPA, New York, 1994.
, “AICPA Professional Standards.” AICPA, New York, 1995.
Financial Accounting Standards Board, “Classification of Short-Term Obligations Expected to Be Refinanced,”
Statement of Financial Accounting Standards No. 6. FASB, Stamford, CT, 1975.
, “Accounting for Leases,” Statement of Financial Accounting Standards Board No. 13. FASB, Stamford,
CT, 1975.
32
•
94
STATE AND LOCAL GOVERNMENT ACCOUNTING
, “Objectives of Financial Reporting by Nonbusiness Organizations,” Statement of Financial Accounting
Concepts No. 4. FASB, Stamford, CT, 1980.
General Accounting Office, “Government Auditing Standards.” GAO, Washington, DC, 1994.
Governmental Accounting Standards Board, “Codification of Governmental Accounting and Financial Reporting
Standards.” GASB, Stamford, CT, 1995.
Government Finance Officers Association, “Governmental Accounting, Auditing and Financial Reporting.”
GFOA, Chicago, IL, 1994. (Study guide available)
APPENDIX 32.1: PRONOUNCEMENTS ON STATE AND LOCAL
GOVERNMENT ACCOUNTING
APPENDIX 32.1 32
•
95
Statement No. 1 Authoritative Status of NCGA On issuance (7/84)
Pronouncements and AICPA Industry

Audit Guide
Statement No. 2 Financial Reporting of Deferred Financial statements for
Compensation Plans Adopted under periods ending after 2/15/86
the Provisions of Internal Revenue
Code Section 457
Statement No. 3 Deposits with Financial Institutions, Financial statements for
Investments (including Repurchase periods ending after 2/15/86
Agreements), and Reverse
Repurchase Agreements
Statement No. 4 Applicability of FASB Statement No. On issuance (9/86)
87, “Employers’ Accounting for
Pensions,” to State and Local
Governmental Employers
Statement No. 5 Disclosure of Pension Information by Financial reports issued for
Public Employee Retirement Systems fiscal years beginning after
and State and Local Governmental 12/15/86
Employers
Statement No. 6 Accounting and Financial Reporting for
Financial statements for periods
Special Assessments
beginning after 6/15/87
Statement No. 7 Advance Refundings Resulting in Fiscal periods beginning after
Defeasance of Debt 12/15/86
Statement No. 8 Applicability of FASB Statement No. Fiscal periods beginning after
93, Recognition of Depreciation by 5/15/87
Not-for-Profit Organizations, to
Certain State and Local
Governmental Entities
Statement No. 9 Reporting Cash Flows of Proprietary Fiscal periods beginning after
and Nonexpendable Trust Funds and 12/15/89

Governmental Entries that Use
Proprietary Fund Accounting
Statement No. 10 Accounting and Financial Reporting for Pools—Fiscal periods beginning
Risk Financing and Related after 6/15/90
Insurance Issues Other—Fiscal periods beginning
after 6/15/93
Statement No. 11 Measurement Focus and Basis of Fiscal periods beginning after
Accounting—Governmental Fund 6/15/94
Operating Statements
Statement No. 12 Disclosure of Information on Fiscal periods beginning after
Postemployment Benefits Other than 6/15/90
Pension Benefits by State and Local
Governmental Employers
(Continued)
Government Accounting Standard Board Effective Date
32
•
96
STATE AND LOCAL GOVERNMENT ACCOUNTING
Statement No. 13 Accounting for Operating Leases with Leases with terms beginning
Scheduled Rent Increases after 6/30/90
Statement No. 14 The Financial Reporting Entity Fiscal periods beginning after
12/15/92
Statement No. 16 Accounting for Compensated Absences Fiscal periods beginning after
June 15, 1993
Statement No. 17 Measurement Focus and Basis of Immediately
Accounting—Governmental Fund
Operating Statements: Amendment of
Effective Dates of GASB Statement
No. 11 and Related Statements

Statement No. 18 Accounting for Municipal Solid Waste Fiscal periods beginning after
Landfill Closure and Post-closure June 15, 1993
Care Costs
Statement No. 19 Governmental College and University Fiscal periods beginning after
Omnibus Statement June 15, 1993
Statement No. 20 Accounting and Financial Reporting for Fiscal periods beginning after
Proprietary Funds and Other December 15, 1993
Governmental Entities That Use
Proprietary Fund Accounting
Statement No. 21 Accounting for Escheat Property Fiscal periods beginning after
June 15, 1994
Statement No. 23 Accounting and Financial Reporting for Fiscal periods beginning after
Refundings of Debt Reported by June 15, 1994
Proprietary Activities
Statement No. 24 Accounting and Financial Reporting for Fiscal periods beginning after
Certain Grants and Other Financial June 15, 1995
Assistance
Statement No. 25 Financial Reporting for Defined Benefit
Fiscal periods beginning after
Pension Plans and Note Disclosures
June 15, 1996, Statement
for Defined Contribution Plans
No. 26 must be implemented
simultaneously
Statement No. 26 Financial Reporting for Fiscal periods beginning after
Postemployment Healthcare Plans June 15, 1996, Statement
Administered by Defined Benefit No. 25 must be implemented
Pension Plans simultaneously
Statement No. 27 Accounting for Pensions by State and Fiscal periods beginning after
Local Governmental Employers June 15, 1997

Statement No. 28 Accounting and Financial Reporting for Fiscal periods beginning after
Securities Lending Transactions December 15, 1995
Statement No. 29 The Use of Not-for-Profit Accounting Fiscal periods beginning after
and Financial Reporting Principles December 15, 1995
by Governmental Entities
Statement No. 30 Risk Financing Omnibus Fiscal periods beginning after
June 15, 1996
Statement No. 31 Accounting and Financial Reporting Fiscal periods beginning after
for Certain Investments and for June 15, 1997
External Investment Pools
Statement No. 32 Accounting and Financial Reporting for Earlier of fiscal periods
Internal Revenue Code Section 457 beginning after December 31,
Deferred Compensation Plans
1998, or amendment of the IRC
Section 457 Plan
Government Accounting Standard Board Effective Date
APPENDIX 32.1 32
•
97
Statement No. 33 Accounting and Financial Reporting Periods beginning after June
for Nonexchange Transactions 15, 2000
Statement No. 34 Basic Financial Statements—and (6)
Management’s Discussion and
Analysis—for State and Local
Governments
Statement No. 35 Basic Financial Statements––and (7)
Management’s Discussion and
Analysis—for Public Colleges
and Universities: Amendment
of GASB Statement No. 34

Statement No. 36 Recipient Reporting for Certain Simultaneously with Statement No.
Shared Nonexchange Revenues: 33
Amendment of GASB Statement
No. 33
Statement No. 37 Basic Financial Statements—and (8)
Management’s Discussion and
Analysis—for State and
Local Governments: Omnibus
Statement No. 38 Certain Financial Statement Note (9)
Disclosures Discussion and Analysis—
for State and Local Governments
Statement No. 39 Determining Whether Certain Periods beginning after
Organizations Are Component Units June 15, 2003
Interpretation No. 1 Demand Bonds Issued by State and Fiscal periods ending after
Local Governmental Entities June 15, 1985
Interpretation No. 2 Disclosure of Conduit Debt Fiscal periods beginning after
Obligations December 15, 1995
Interpretation No. 3 Financial Reporting for Reverse Fiscal periods beginning after
Repurchase Agreements December 15, 1995
Interpretation No. 4 Accounting and Financial Reporting for Fiscal periods beginning after
Capitalization Contributions to June 15, 1996
Public Entity Risk Pools
Interpretation No. 5 Property Tax Revenue Recognition in Fiscal periods beginning after
Governmental Funds June 15, 2000
(Continued)
Government Accounting Standard Board Effective Date
6
In three phases, based on total annual revenue in the first fiscal year ending after June 15, 1999;
Phase 1—governments with total annual revenues of $100 million or more, fiscal periods beginning
after June 15, 2001; Phase 2—governments with total annual revenues of $10 or more but less than

100 million, fiscal periods beginning after June 15, 2002; Phase 3—governments with total annual
revenues of less than $10 million, fiscal periods beginning after June 15, 2003.
7
Public institutions that are components of another reporting entity should implement the Statement
no later than the same year as their primary government. For public institutions that are not compo-
nents of another reporting entity, this Statement is effective in the three phases indicated in the pre-
ceding footnote.
8
Simultaneously with Statement No. 34. For governments that implemented Statement No. 34 before
Statement No. 37 was issued, Statement No. 37 is effective for periods beginning after June 15, 2000.
9
In three phases, based on total annual revenue in the first fiscal year ending after June 15, 1999: Phase 1—
governments with total annual revenues of $100 million or more, fiscal periods beginning after June 15,
2001; Phase 2—governments with total annual revenues of $10 million or more but less than $100 million,
fiscal periods beginning after June 15, 2002; Phase 3—governments with total annual revenues of less than
$10 million, fiscal periods beginning after June 15, 2003.
32
•
98
STATE AND LOCAL GOVERNMENT ACCOUNTING
Interpretation No. 6 Recognition and Measurement of Simultaneously with Statement No.
Certain Liabilities and Expenditures 34
in Governmental Fund Financial
Statements: an Interpretation of
NCGA Statements 1, 4, and 5,
NCGA Interpretation 8, and GASB
Statement Nos. 10, 16, and 18
Technical Bulletin Purpose and Scope of GASB Technical None
No. 84-1 Bulletins and Procedures for Issuance
Technical Bulletin Applying Paragraph 66 of GASB On issuance (1/87)

No. 87-1 Statement No. 3
Technical Bulletin Disclosures about Derivatives and Fiscal periods ending after
No. 94-1 Similar Debt and Investment December 15, 1994
Transactions
Technical Bulletin Application of Certain Pension Fiscal periods beginning after
No. 96-1 Disclosure Requirements for June 15, 1996
Employers Pending Implementation
of GASB Statement No. 27
Technical Bulletin Classification of Deposits and Fiscal periods beginning after
No. 97-1 Investments into Custodial Credit December 15, 1997
Risk Categories for Certain Bank
Holding Company Transactions
Concepts Statement Objectives of Financial Reporting None
No. 1
Concepts Statement Reporting Service Efforts and None
No. 2 Accomplishments
Statement 1 Governmental Accounting and Fiscal years ending after 6/30/80
Financial Reporting Principles
Statement 2 Grant, Entitlement, and Shared Fiscal years ending after 6/30/80
Revenue Accounting by State and
Local Governments
Statement 3 Defining the Governmental Reporting Prospectively for fiscal years
Entity (Superseded) ending after 12/31/82
Statement 4 Accounting and Financial Reporting Fiscal years beginning after
Principles for Claims and Judgments 12/31/82; ¶20 extended
and Compensated Absences indefinitely by NCGAI 11
Statement 5 Accounting and Financial Reporting Fiscal years beginning after
Principles for Lease Agreements of 6/30/83
State and Local Governments
Statement 6 Pension Accounting and Financial Extended indefinitely by

Reporting: Public Employee NCGAI 8
Retirement Systems and State and
Local Government Employers
Statement 7 Financial Reporting for Component Prospectively for fiscal years
Units Within the Governmental ending after 6/30/84
Reporting Entity
Interpretation 1 GAAFR and the AICPA Audit Guide Issued 4/86; superseded by
(Superseded) NCGAS 1
Interpretation 3 Revenue Recognition—Property Taxes Fiscal years beginning after
9/30/81
Government Accounting Standard Board Effective Date
National Council on Government Accounting Effective Date
APPENDIX 32.1 32
•
99
Interpretation 4 Accounting and Financial Reporting for
Fiscal years beginning after
Public Employee Retirement Systems
6/15/82; superseded by
and Pension Trust Funds (Superseded) NCGAS 6 and repealed by
NCGAI 8
Interpretation 6 Notes to the Financial Statements Prospectively for fiscal years
Disclosure beginning after 12/31/82
Interpretation 7 Clarification as to the Application of the On issuance
Criteria in NCGA Statement 3,
“Defining the Governmental
Reporting Entity”
Interpretation 8 Certain Pension Matters Fiscal years ending after
12/31/83
Interpretation 9 Certain Fund Classifications and Fiscal years ending after 6/30/84

Balance Sheet Accounts
Interpretation 10 State and Local Government Fiscal years ending after 6/30/84
Budgetary Reporting
Interpretation 11 Claim and Judgment Transactions for On issuance (4/84)
Governmental Funds
GASB Exposure Drafts Outstanding 2/28/98
The Financial Reporting Entity: Affiliated Organizations
Accounting and Financial Reporting for Nonexchange Transactions
National Council on Government Accounting Effective Date
CHAPTER
33
NOT-FOR-PROFIT ORGANIZATIONS
Ronald F. Ries, CPA
American Express Tax and Business Services, Inc.
Ian J. Benjamin, CPA
American Express Tax and Business Services, Inc.
33.1 THE NOT-FOR-PROFIT
ACCOUNTING ENVIRONMENT 2
(a) Current Status of Accounting
Principles 2
(i) Summary of SFAS Nos. 116
and 117 4
(ii) Decisions 6
(iii) AICPA Audit Guide and
Other Guidance 7
(iv) Projects in Process 9
(b)
Government Audit Requirements
10

33.2 NOT-FOR-PROFIT ACCOUNTING
PRINCIPLES AND REPORTING
PRACTICES 10
(a) Principal Accounting and
Reporting Requirements 10
(b) Basis of Accounting: Cash or
Accrual 12
(c) Fund Accounting 12
(i) Reclassification of
Funds into Classes 13
(d) Reclassifications 14
(e) Appropriations 14
(f) Fixed Assets 14
(i) Fixed Assets Where Title
May Revert to Grantors 15
(g) Depreciation 15
(h) Investment Income 16
(i)
Gains and Losses on Investments
16
(j) Contributions 17
(i)
Expendable Current
Support
17
(ii) Gifts-in-Kind 20
(iii) Support Not Currently
Expendable 22
(iv) Transfers of Assets to a
Not-for-Profit Organization

or Charitable Trust That
Raises or Holds
Contributions for Others 28
(k) Related Organizations 30
(i) Definition of the
Reporting Entity 30
(ii) Pass-Through Gifts 33
(l) Cash Flows 35
(m) Governmental versus
Nongovernmental Accounting 35
33.3 SPECIFIC TYPES OF ORGANIZATIONS 35
(a) Voluntary Health and Welfare
Organizations 39
(i) Financial Statements 39
(ii) Balance Sheet 39
(iii) Statement of Support,
Revenue and Expenses, and
Changes in Net Assets 43
(iv) Statement of Cash Flows
(Formerly Changes in
Financial Position) 47
(v) Statement of Functional
Expenses 47
33
•
1
The authors wish to acknowledge that the exhibits and inspiration for this work were derived from the
work Financial and Accounting Guide for Not-for-Profit Organizations, 5th Edition, by Price Waterhouse
LLP, Malvern J. Gross Jr., Richard F. Larkin, Roger S. Bruttomesso, and John J. McNally (John Wiley &
Sons, Inc., 1995).

33.1 THE NOT-FOR-PROFIT ACCOUNTING ENVIRONMENT
Not-for-profit organizations range from the large and complex to the small and simple. They
include hospitals, colleges and universities, voluntary social service organizations, religious
organizations, associations, foundations, and cultural institutions. All are confronted with
accounting and reporting challenges. All are presently covered by authoritative accounting lit-
erature. This chapter discusses not-for-profit accounting and reporting conventions and exam-
ines accounting pronouncements, auditing concerns, and the regulatory environment
applicable to different types of not-for-profit organizations. Health care organizations are cov-
ered in Chapter 34.
As this latest edition of the Handbook goes to press, there are many issues within our com-
munity, including the accounting environment, which requires all organizations, including not-
for-profits, to adhere to accounting policies and principles with the utmost due diligence
required to satisfy a scrutinizing public and government regulators.
(a) CURRENT STATUS OF ACCOUNTING PRINCIPLES. Not-for-profit accounting has
undergone a period of profound change. In the recent past, authoritative accounting principles
and reporting practices were established for many not-for-profit organizations that previously
had neither.
In 1972, the AICPA issued an Industry Audit Guide for hospitals. In 1973, an Industry Audit
Guide for colleges and universities was issued. And in 1974, a third not-for-profit Industry Audit
Guide, for voluntary health and welfare organizations, was issued. In 1990, the AICPA issued a new
audit and accounting guide, “Audits of Providers of Health Care Service,” to replace the 1972 hos-
pital audit guide.
(b) Colleges and Universities 47
(i) Fund Accounting 47
(ii)
Encumbrance Accounting
48
(c) Other Not-for-Profit
Organizations 48
(i) Accounting Principles 48

33.4 AUDIT CONSIDERATIONS FOR
A NOT-FOR-PROFIT
ORGANIZATION 49
(a) General Considerations 49
(b) Internal Control 49
(c) Materiality 49
(d) Taxes 49
(e) Consolidation 49
(f) Compliance Auditing 49
(g) Unique Auditing Areas 50
33.5 SOURCES AND SUGGESTED
REFERENCES 50
APPENDIX 33.1:
FACTORS TO BE CONSIDERED
IN DISTINGUISHING CONTRACTS FOR THE
PURCHASE OF GOODS OR SERVICES FROM
RESTRICTED GRANTS
52
APPENDIX 33.2:
FACTORS TO BE CONSIDERED
IN ASSESSING WHETHER CONTRIBUTED
SERVICES ARE CONSIDERED TO REQUIRE
SPECIALIZED SKILLS
53
APPENDIX 33.3: CHECKLIST—
FACTORS
TO BE CONSIDERED IN DETERMINING
WHETHER AN ORGANIZATION WOULD
TYPICALLY NEED TO PURCHASE
SERVICES IF NOT PROVIDED BY

DONATION
54
APPENDIX 33.4:
FACTORS TO BE
CONSIDERED IN ASSESSING WHETHER
A DONOR HAS MADE A BONA FIDE
PLEDGE TO A DONEE
56
APPENDIX 33.5: CHECKLIST—
FACTORS
TO BE CONSIDERED IN DECIDING
WHETHER A GIFT OR PLEDGE SUBJECT
TO DONOR STIPULATIONS IS
CONDITIONAL OR RESTRICTED
57
APPENDIX 33.6:
CONSIDERATION OF
WHETHER ITEMS MAY BE REPORTED
AS OPERATING OR NONOPERATING
60
33
•
2
NOT-FOR-PROFIT ORGANIZATIONS
In late 1978, the AICPA issued SOP 78-10, “Accounting Principles and Reporting Practices for
Certain Nonprofit Organizations.” SOP 78-10 defines accounting principles and reporting practices
for all not-for-profit organizations not covered by earlier guides.
For several years, as the most current broad-scope pronouncement of the accounting profession
on not-for-profit accounting, the SOP was the authoritative reference for not-for-profit accounting
and reporting questions for the organizations covered, and it was consulted for guidance by other or-

ganizations on questions not addressed in their respective audit guides.
These guides and the SOP had a dramatic effect on not-for-profit accounting, as they represented
the first authoritative attempt to codify accounting principles and reporting practices for the not-for-
profit industry. However, inconsistencies existed among the four guides, and they frequently contra-
dicted one another on key accounting concepts. Also, the accounting principles presented in the
guides had limited authority as they constituted GAAP only until formal standards were set on this
subject by the FASB.
By the early 1980s, persons interested in not-for-profit accounting issues had identified the fol-
lowing key areas of accounting that would have to be considered in unifying the diverse not-for-
profit accounting practices:
•
Reporting entity (when controlled and affiliated organizations should be included in an entity’s
financial statements)
•
Depreciation
•
Joint costs of multipurpose activities, particularly those involving a fund-raising appeal (on
what basis such costs should be divided among the various purposes served)
•
Revenue recognition for expendable/restricted receipts (when, in which fund, and how such
items should be reported as revenue)
•
Display (what format should be used to present financial data)
•
Valuation of investments
•
Contributions (how these should be valued, when and how they should be reported)
•
Grants awarded to others (when these should be accrued and expensed by the grantor)
Before accounting principles could be written, concepts had to be developed. The FASB had orig-

inally excluded not-for-profits from concepts development, but later started a separate project for
not-for-profits. The first concepts statement under this project was issued in 1980. SFAC No. 4, “Ob-
jectives of Financial Reporting by Nonbusiness Organizations,” proved to be so similar to the corre-
sponding statement for businesses (SFAC No. 1) that the FASB started thinking in terms of only one
set of concepts. Indeed, SFAC No. 2 was amended to include not-for-profits; SFAC No. 6, “Elements
of Financial Statements” covers both types of entities, although some parts of this statement deal
separately with the two sectors.
The FASB identified five areas in which it planned to develop accounting principles for not-for-
profits: depreciation, contributions, the reporting entity, financial statement display, and investments,
and has issued the following standards that have revolutionized not-for-profit accounting.
•
Depreciation is the subject of SFAS No. 93. Effective in 1990, this requires all not-for-profits to
depreciate long-lived tangible assets, except that museum collections and similar assets often
considered to be inexhaustible need not be depreciated if verifiable evidence of their inex-
haustibility is available.
•
Accounting for contributions received and made and for museum collections is the subject of
FASB Statement No. 116, effective beginning in 1995. Upon adoption it requires a number of
significant changes to accounting practices previously followed by many not-for-profit organi-
zations. It requires immediate revenue recognition for all unconditional gifts and pledges, re-
gardless of the presence of donor restrictions and regardless of the intended period of payment
(pledges payable in future periods will be discounted to present value). Donors will follow a
33.1 THE NOT-FOR-PROFIT ACCOUNTING ENVIRONMENT 33
•
3
similar policy for recording expenses and liabilities. Donated services of volunteers will be
recorded by charities if certain criteria are met. Museum collection items will be capitalized un-
less certain criteria are met.
The requirement for immediate recognition of revenue for purpose and time restricted gifts
results from FASB’s conclusion in SFAC No. 6 that unspent expendable restricted gifts do not

normally meet the definition of a liability (deferred revenue).
•
Financial statement format was initially the subject of initial work by an AICPA task force.
FASB issued a statement of financial accounting standards No. 117 on financial statement for-
mat in June 1993. It became effective in 1995, at the same time as the new standard on contri-
butions (previous bullet).
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In 1995, the FASB issued SFAS No. 124, “Accounting for Certain Investments Held by
Not-for-Profit Organizations.” Briefly, its requirements are that all marketable securities
be reported at current value in the balance sheet, and that unrealized losses be reported in
the unrestricted class of net assets (absent donor restrictions or law which would require
reporting losses in a restricted class). A more detailed summary of this standard is at Sec-
tion 33.2(i).
• In 1999, the FASB issued SFAS No. 136, “Transfers of Assets to a Not-for-Profit Organization
or Charitable Trust that Raises or Holds Contributions for Others.” It differentiates situations in
which not-for-profit organizations act as agents, trustee, or intermediaries from situations in
which not-for-profit organizations act as donors and donees. It also indicates how organizations
that act as agents, trustees, or intermediaries are to report receipts and disbursements of assets
if those transfers are not its contributions as defined in SFAS No. 116 and how a beneficiary is
to report its rights to the assets held by a recipient organization.
(i) Summary of SFAS Nos. 116 and 117
Implementation Schedule. Both Statements were issued in June 1993. They were effective for
fiscal years beginning after December 15, 1994 (e.g., for a June 30 year-end entity, for the fiscal year
ending June 30, 1996). Adoption of No. 117 must be made retroactively; adoption of No. 116 can be
made either retroactively or prospectively. Copies are available from the FASB Order Department:
P.O. Box 5116, Norwalk, CT 06856.
SFAS No. 117 (Display).
Statement No. 117 requires organizations to present aggregated finan-
cial data: total assets, liabilities, net assets (fund balances), and change in net assets. Some not-for-
profits already do, but many have not done this in the past. Organizations are free to present data

disaggregated by classes of net assets (corresponding to funds), but, except for donor-restricted
revenue, net assets, and change in net assets, no detail by class is explicitly required.
Three classes of net assets are defined: unrestricted, temporarily restricted, and permanently re-
stricted. Net assets of the two restricted classes are created only by donor-imposed restrictions on
their use. All other net assets, including board-designated or appropriated amounts, are legally unre-
stricted, and must be reported as part of the unrestricted class, although they may be separately iden-
tified within that class as designated if the organization wishes.
Permanently restricted net assets will consist mainly of amounts restricted by donors as perma-
nent endowment. Some organizations may also have certain capital assets on which donors have
placed perpetual restrictions. Temporarily restricted net assets will often contain a number of differ-
ent types of donor-restricted amounts: unspent purpose-restricted expendable gifts for operating pur-
poses, pledges payable in future periods, unspent explicitly time-restricted gifts, unspent amounts
restricted for the acquisition of capital assets, certain capital assets, unmatured annuity and life in-
come funds, and term endowments.
One requirement that is a significant change for many organizations is the reporting of all ex-
penses in the unrestricted class, regardless of the source of the financing of the expenses. As ex-
33
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NOT-FOR-PROFIT ORGANIZATIONS
pendable restricted revenue will be reported in the temporarily restricted class, when these amounts
are spent, a reclassification (transfer) will be made to match the restricted revenue with the unre-
stricted expenses.
A second requirement is that all capital gains or losses on investments and other assets or liabilities
will be reported in the unrestricted class, no matter which class holds the under
lying assets/liabilities,
unless there are explicit donor restrictions, or applicable law, which require the reporting of some or
all of the capital gains/losses in a restricted class. This practice will often have the effect of increas-
ing the reported unrestricted net asset balance (and decreasing the other net asset balances), com-
pared with previous reporting principles.

All organizations must report expenses by functional categories (program, management, fund-
raising). Voluntary health and welfare organizations must also report expenses by natural categories
(salaries, rent, travel, etc.) in a matrix format; other organizations are encouraged to do so. Reporting
in functional categories is new for some organizations, mainly those that do not raise significant
amounts of contributions from the general public, such as trade associations, country clubs, and
many local churches.
A new financial statement for many organizations is a statement of cash flows, showing
where the organization received and spent its cash. Cash flows will be reported in three
categories: operating flows, financing flows (including receipt of nonexpendable contribu-
tions), and investing flows. This statement has been required for businesses for several years
by SFAS No. 95, which should be consulted for further information.
Statement No. 95 permits either of two basic methods for preparing the statement of cash flows:
the “direct” or the “indirect” method. Briefly, the indirect method starts with the excess of revenues
over expenses and reconciles this number to operating cash flows. The direct method reports operat-
ing cash receipts and cash disbursements, directly adding these to arrive at operating cash flows. The
authors believe the direct method is much more easily understood by readers of financial statements,
and thus recommends its use.
Much of the information used to prepare a statement of cash flows is derived from data in the
other two primary financial statements, some of it from the preceding year’s statements. Thus, when
planning to prepare this statement for the first time, it is helpful to start a year in advance so that the
necessary prior-year data is available when needed.
Sample financial statements, illustrating formats that contain the disclosures required by State-
ment No. 117, are shown in Appendix C to the Statement.
SFAS No. 116 (Contributions). This document establishes one set of standards for all re-
cipients of contributions, replacing the four different standards in the four AICPA audit
guides. It also sets standards for donors of gifts; no explicit standards have heretofore ex-
isted, except for private foundations. For-profit organizations are also covered by this part of
the document.
Certain types of transactions are not considered contributions: transactions that are in sub-
stance purchases of goods or services (even though they may be called grants) and transactions in

which a recipient of a “gift” is merely acting as an agent or intermediary for, and passes the gift
on to, another organization. Unfortunately, there is not much specific guidance for how to distin-
guish these two situations from real contributions; organizations will have to use judgment on a
case-by-case basis.
SFAS No. 116 explicitly introduces a new concept into accounting for contributions: the
conditional promise to give (pledge). This concept has implicitly existed for a long time, but
has never before been articulated so clearly. A conditional pledge is one that depends on
the occurrence of some specified uncertain future event to become binding on the pledgor. Ex-
amples of such events are the meeting of a matching requirement by the pledgee, or natural or
man-made disasters such as a flood or fire. The mere passage of time is not a condition. Note
that the concept of a condition is completely separate from that of a restriction. Conditions re-
late to events that must occur prior to a pledge becoming binding on the pledgor; restrictions
relate to limits on the use of a gift after receipt.
33.1 THE NOT-FOR-PROFIT ACCOUNTING ENVIRONMENT 33
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